U.S., Canada, Mexico Agree on NAFTA Replacement

After railing against the North American Free Trade Agreement (NAFTA), the Trump administration has reached a deal with Canada and Mexico for a replacement pact, called the U.S.-Mexico-Canada Agreement, or USMCA. For the auto industry, the new agreement ends the threat of major tariffs on cars and trucks imported into the U.S. from assembly plants in Canada and Mexico, although it does raise costs for vehicles produced south of the border.

Under the terms of the agreement, both Canada and Mexico are allowed to export 2.6 million cars and trucks to the United States before any tariffs would be imposed. Neither country sends that many cars here today. And both countries would evade any auto-related tariffs on cars and parts that might yet be imposed on other countries. The administration has threatened to impose a 25 percent tax on all imported passenger vehicles, and already this past summer, the United States Trade Representative imposed a 25 percent duty on new-vehicle imports from China-although that affects only a few models, chiefly the Buick Envision SUV along with the Volvo S90 and the Cadillac CTS plug-in hybrid.

The agreement also increases the amount of North American content in a vehicle necessary to avoid tariffs to 75 percent, up from 62.5 percent. And, to slow the move to low-wage Mexico, it requires that 30 percent of the total-rising to 40 percent by 2030-must come from workers with average wages of $16 per hour or more (pay in Mexico is closer to $5 an hour).

The agreement is expected to be signed by all three parties by November 30. It will then need to be ratified; in the U.S., Congress is expected to take it up in 2019. If ratified, it would take effect starting in 2020.